Tiddler telcos turning into bigger fish

Richard Hemming

Ask any fund manager at the big end of town about a good stock pick and they’ll tell you about the original ‘‘buying opportunity’’ which occurred after a negative piece of news drove an overreaction by investors’ selling, but which they (rightly) regarded as a temporary blemish to be taken advantage of.

We look for exactly those types of situations. After all, it’s only when a company has some bad news factored into its share price that there is an opportunity for management to ‘‘correct’’ market expectations, through delivering better than expected profits.

But with many stocks both big and small hitting their numbers and delivering positive outlook statements in the current reporting season, does this mean that all the good news is in the price?

For many, especially at the big end, this is probably the case. But for small companies that are turning into bigger entities through fast growth, that seemingly elusive ‘‘buying opportunity’’ might be now.

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This is on the basis that its story is sustainable, meaning you can see that the company is going to be around for a long time because it’s not easily competed out of business and it has only penetrated small areas of its potential market.

Moreover, it must have the ability to replicate its success across a much bigger client base.

Two examples we have come across that match this criteria are both in the telecommunications industry, and both have developed a strong niche and have a market share in the region of 1 per cent.

If these businesses can double their market share, it has an exponential effect on their bottom line because of the high fixed costs involved in the sector, which lends itself to economies of scale.

One is BigAir (BGL), which operates Australia’s largest wireless network, and is also the largest provider of managed internet services for student accommodation in the country.

The company has been quiet for the past few months.

One we are more optimistic about and which burst onto the scene even more recently is MyNetFone (MNF). The company is the dominant provider of hosted voice and data communications services for residential, business and government.

It also owns and operates Australia’s largest VoIP (voice over internet protocol) communications network, as a provider of wholesale carrier services to mainly domestic customers.

This company’s recently reported full-year results were very strong, with revenues up 28 per cent to $59.3 million, producing a 40 per cent increase in its net profit to $5.8 million.

Chief executive Rene Sugo said that the high margins would continue (in fact get higher) due to further growth in the VoIP and hosted PBX business.

It is not hard to believe him, considering the small size of this group. Of course, you have to remember that it’s still a minnow in the land of giants, which includes Telstra.

Click here to access the weekly newsletter Under the Radar Report: Small Caps AFSL 409518 edited by Richard Hemming.